Capital gains tax UK: What is it and how does it work?

Telegraph

16 hours ago

Capital gains tax (CGT) in the UK is payable when an individual sells a valuable asset they own – most commonly, this will be a property that's not their main residence, or shares.
It's important to understand how this tax works to make sure you're clear when it's due, when you need to inform HMRC of the profit income, and how much you'll need to pay.
Here, Telegraph Money explains how to navigate the UK's CGT rules and ensure you don't pay more tax than you need to. In this article, we will cover:
What is capital gains tax?
How does CGT work on property?
How does it work on shares?
Capital gains tax FAQs
What is capital gains tax?
Capital gains tax in the UK is a tax levied on the profit you make when you sell an asset that has increased in value.
CGT is triggered when an asset is sold for a profit, provided you have exceeded the annual exempt amount of £3,000.
The tax is paid at different rates, depending on your income tax band. There used to be one rate for selling property (except for your main home, which remains exempt) and another for other assets, but these rates were brought in line in last year's Autumn Budget.
For the 2025-2026 tax year (6 April 2025 to 5 April 2026), for gains exceeding the annual exempt allowance, the following rates apply to most assets:
Basic-rate taxpayers: 18pc on capital gains from assets
Higher-rate taxpayers: 24pc on capital gains from assets
For disposals made between April 6 2024 and October 29 2024:
Basic-rate taxpayers: 10pc on gains from assets other than residential property; 18pc on gains from residential property.
Higher-rate taxpayers: 20pc on gains from assets other than residential property; 28pc on gains from residential property.
Assets held in an Isa are free from capital gains tax.
How does CGT work on property?
You don't typically pay capital gains tax on the property you live in, only on properties like a second home or buy-to-let.
The rate of tax charged depends on your level of income – if you're a basic-rate taxpayer (with income of less than £50,270), you'll pay 18pc on gains from property, whereas those who pay higher-rate tax will pay 24pc for disposals in the 2024-25 tax year.
How does it work on your primary residential property?
If you own one home and have lived there since you bought it, then it should be a straightforward case that no CGT is due on any profit made when you sell up. This is thanks to a relief known as private residence relief.
However, should you own other properties it may not be so clear cut. For example, if you have ever rented out the property you now live in – perhaps while you worked abroad, or moved in with a partner for a spell – then you might be liable to pay a proportion of CGT when you sell, based on how long the property was rented for.
Zoe Davies, of accountancy firm Forvis Mazars, added that second homeowners can declare which property is their main residence, to make it clear where tax is due.
She said: 'If you have a second home you can nominate which is your primary home – that is, where you actually live – to help make sure you benefit from private residence relief if you sell.'
To nominate which property is your home, you'll need to write to HMRC.
To do this (which you can do within two years every time your combination of homes changes), write to HMRC at: Capital Gains Tax Queries, HM Revenue and Customs, BX9 1AS.
You'll need to provide the address of the home you want to nominate, and all the owners of the property must sign the letter.
Private residence relief cannot be claimed on parts of property used exclusively for business use, although having a 'temporary or occasional' home office is allowed.
Therefore, as long as your home office is not solely dedicated to business use, it should be exempt from CGT.
How does it work for second homes?
Tax is due on the gains you make from the sale of a second home, which exceed your annual capital gains tax allowance.
For property, CGT is set at:
24pc for higher-rate taxpayers
18pc for basic rate taxpayers.
Prior to April 6, 2024 the higher rate was charged at 28pc.
You will be taxed at the relevant rate on the sale profits of your second home, and you must report the sale to HMRC via a 'residential property return', and pay the estimated liability within 60 days of completing your sale.
You'll also declare this on a self-assessment tax return as capital gains count as a source of income.
Ms Davies added: 'If you spend significant time [living in] a second home, however, it may be that you are eligible for a reduced tax bill through private residence relief.'
How does capital gains tax work on rental property?
For capital gains tax purposes, selling buy-to-let properties works in the same way as selling a second home.
Therefore, you need to report a sale of a buy-to-let property to HMRC and pay any tax due within 60 days of the sale completing. The rates are also the same – 24pc for higher-rate taxpayers (in 2024-25) and 18pc for basic-rate taxpayers.
Capital gains example for landlords
If a landlord bought a property 10 years ago for £200,000 and they are now selling it for £300,000, that would be a gain of £100,000.
Minus the £3,000 allowance, the taxable gain is therefore £97,000.
Basic-rate taxpayer
Rather than pocket the £97,000 profit, a basic-rate taxpayer (paying 18pc) would have to pay £17,460 in CGT
This would leave them with a taxable gain of £79,540
Total profit would be £79,540 + £3,000 (tax-free allowance) = £82,540
Higher-rate taxpayer
For a higher-rate taxpayer (paying 24pc), the tax bill would be £23,280
This would leave a taxable gain of £73,720
Total profit would be £73,720 + £3,000 (tax-free allowance) = £76,720
When selling a second home or buy-to-let property, you can lower the CGT bill by ensuring you take into account the cost of refurbishments you've made in the years you've owned the property.
The cost of any improvements made to the property while you owned it, such as a new bathroom or conservatory, should be added to your initial outgoings, as should stamp duty and legal fees.
You can also deduct expenses like solicitor's fees from the selling price – instead, use the amount of money which you actually end up receiving.
It's also possible to offset losses from previous tax years, or from the sale of other properties, from your overall gain.
How does capital gains tax work on shares?
If you sell some investments and they are held outside an Isa, then you must pay CGT on profits over the annual allowance of £3,000.
The rates are now equal to those you pay for property – so, basic-rate taxpayers pay 18pc, while those on a higher-rate pay 24pc.
This changed on October 30, following Labour's Autumn Budget. For assets disposed of before this date, basic-rate taxpayers pay a CGT rate of 10pc, and for higher- and top-rate taxpayers, it's 20pc.
You'll include the gains on your self-assessment tax return – there's no rush to declare or pay within a more immediate time frame, as is the case of selling property.
However, be aware that tax may still be due even if you don't sell the shares in a traditional way.
Ms Davies said: 'Some investors fall foul of the rules when they give shares to, say, their son or daughter, thinking there's no capital gains tax due because they're not selling them. However, the HMRC definition is that capital gains tax is triggered on the 'disposal of assets', so even though no money is changing hands, they could still trigger a tax bill. Any shares gifted should be declared on a self- assessment tax return.'
Others might get caught out thinking they owe capital gains tax when it's actually income tax that's applicable in some cases.
Ms Davies said: 'For example, if you own a company and sell some of your shares back to the company, the money received may actually be classed as income by HMRC, and so income tax is due rather than capital gains tax.'
How does capital gains tax work on cryptocurrency?
Profits from selling cryptocurrencies like Bitcoin are assets and subject to capital gains tax.
Cryptocurrency is treated as a form of investment, and regulated in a similar way to stocks and shares. As such, profits on selling some or all of your crypto holdings will be taxable.
Giving away crypto won't solve the tax issue (unless it's to your spouse or civil partner) because, as with shares, you're still 'disposing' of the tokens and so will trigger capital gains tax if you've made a profit on your investment.
It's not just when you sell crypto that CGT might be payable. It can also be due if you use it to pay for goods or services.
In December 2023, HMRC launched a voluntary disclosure campaign, encouraging investors who had not declared any gains from crypto assets to come forward and pay up.
Make sure you have a record of transactions, including dates, amounts, and values in pounds at the time of each transaction.
Capital gains tax FAQs
How is capital gains tax calculated?
The rate of capital gains tax you pay is determined by a combination of your overall earnings, and the type of asset you're selling.
However, other factors can also come into play. For example, if you've made any losses on some assets you're selling, you'll be able to offset those against your gains in order to reduce your bill.
You can also carry losses forward from past tax years, but only up to four years after the end of the tax year in which you sold the asset.
What percentage of capital gains tax do I pay?
This depends on your income tax rate. For the 2025-26 tax year, capital gains tax is charged at the rate of either 18pc for basic-rate taxpayers, or 24pc for higher- or additional-rate taxpayers.
As your gains are added to your annual income, it's possible for gains to push you into a higher tax band. If that happens, then you'll have to pay the higher rate of CGT on your gains.
How does HMRC know about capital gains?
The onus is on you to report any capital gain that gives rise to a tax liability. If you're selling a property, you should declare it and pay the bill within 60 days of the sale completion date. You need to declare it on a self-assessment tax return, too.
For selling shares, you just need to include the figures on your self-assessment tax return. If you don't already do one each year, you will need to complete one for the tax year in which you had a capital gain.
There are various ways HMRC can tell if assets have been sold – be it Land Registry records for property sales, stamp duty returns, trading records – and there can be drastic consequences if it finds out about disposals you have failed to declare.
Receiving taxable income and failing to report it to HMRC counts as tax evasion, and can result in fines, penalties and even criminal proceedings.
How do I report and pay CGT?
To report and pay capital gains tax, you need to:
For property, use the capital gains tax on UK property service for property sales within 60 days of completion. You must also report again via self-assessment by January 31 of the following tax year.
For other assets, report and pay the tax owed via self-assessment by January 31 of the following tax year.
What is the three-year rule for selling property?
You may have heard of the 'three-year rule' for property sales and capital gains tax, which is also known as the 36-month rule. However, for most situations in the UK, this no longer applies. This is due to the rules changing around final period of ownership and Private Residence Relief.
This is the current situation for the 2025-26 tax year:
The standard final period exemption is nine months. If a property has been your only or primary home at any point when you have owned it, the last nine months of your ownership period are exempt from CGT as part of Private Residence Relief.
The three-year or 36 month exemption period now only applies in special circumstances, such as for disabled individuals or for those moving into a long-term care home.
How long do you have to keep a property to avoid capital gains tax in the UK?
In Britain, you don't avoid capital gains tax by keeping a property for a certain amount of time. The tax will apply when you sell a property that's not your main residence, regardless of how long you've owned it for.
How are long-term capital gains taxed?
Assets you've held for a long time are taxed in the same way as any other asset.
Ms Davies added: 'There were previous tax laws which incentivised holding assets for longer, but these no longer apply.'